Zalando Se Ord

Good morning, everyone, and welcome to our Q2 2021 earnings call. Today, I'm again with our CFO, David Schroeder, who will provide you with a brief strategic update, walk you through the financials of the second quarter, and discuss with you our full year 2021 outlook. As usual, this call is being recorded and webcasted live on our Investor Relations website, and a replay of the call will be later available today. David, I will now hand it over to you. Please go ahead.

Thank you Patrick and a warm welcome to all of you from my side as well. Thanks for joining our call today. It's my pleasure today to talk to you about another stellar quarter from a strategic as well as a financial perspective. Our platform strategy is enabling us to play a bigger and bigger role for customers and partners within the European fashion ecosystem and we've set the foundation for continued strong growth in the future. At the same time, we delivered another quarter with exceptional financial performance against a very strong prior year baseline. All this is a testament to the resilience, agility and ingenuity of our Zalando team, who I would like to hereby thank once again for their incredible dedication and support. To recognize the great work done and the challenges we've successfully overcome together during the pandemic, our Zalando team is on staycation this week. That's a collective week off to reset and refresh before we start the upcoming fall winter season, aiming to create many more exciting and memorable moments for our customers and partners. But now, let me please share with you the key highlights. First, we continue to attract exceptional amounts of customers and to engage more deeply with existing ones, as evidenced in our more than 30% active customer growth, as well as new all-time highs in average order frequency and customer spending. This does not only create significant growth opportunities for Zalando, but also for our partners. Our partners capitalized strongly on this growth momentum, residing in a partner program GMV growth of more than 100% year-over-year in the first half of 2021. Second, we remain focused on further deepening the relationships with our customers by improving our core fashion experience and by elevating distinct and marketable propositions such as Zalando Lounge, pre-owned, premium or beauty. We are super excited about the recently announced strategic partnership with Sephora, enabling us to accelerate our multi-year vision to build an industry-leading beauty proposition. As a third highlight and following our announcement at the Capital Markets Day back in March to extend to eight more markets in 2021 and 2022, allowing us to address another 100 million European consumers. We recently launched six new European countries, allowing customers to enjoy Zalando's endless choice, seamless convenience, and tailored digital experience. Fourth, we delivered exceptional financial performance in the second quarter of 2021. We grew GMV by 40% to 3.8 billion euros and achieved a 6.7% adjusted EBIT margin against exceptional Q2 2020 comparables. And last but not least, we are happy to reiterate our upgraded full year 2021 guidance with GND growth of 31 to 36% and revenue growth of 26 to 31% year over year. Thanks to the strong year-to-date performance, we now expect adjusted EBIT in the upper half of our initial 400 to 475 million euro range. While growth rates and return rates are starting to normalize again, we are fully on track to reach our upgraded full year 2021 guidance. As usual, we will now dive deeper into all these highlights during the rest of the presentation. Let's start by taking a closer look at our key platform dynamics, both on the customer as well as the partner side, which continue to show strong traction as pandemic-related restrictions have been gradually lifted from May onwards in most European countries. When looking at our key customer metrics, we saw great progress in the second quarter. We achieved an active customer growth of almost 31% year-over-year, now counting 44.5 million customers across Europe, fueled by ongoing strong new customer acquisition as well as reducing churn rates for existing customers. Customer order frequency reached a new all-time high of five orders per customer over the past 12 months. showing the strong and increasing engagement of both existing as well as new customers on our platform. Average basket size increased slightly by 1.4% year-over-year, mainly driven by ongoing lower-than-normal return rates. As a result of these order frequency and basket size developments, GLV proactive customer continued to grow by 7.8% over the last 12 months. Now, after having a look at our entire customer base, Let us also take a closer look at the behavior of the specific customer cohorts we acquired during the first lockdown last year. At our Capital Markets Day back in March, we showcased the pandemic-induced step change in online penetration and our expectation that online penetration would continue to increase from this higher base post-COVID rather than reverting back to pre-COVID levels. This expectation was supported with customer cohort data from our business. Customers acquired during the first lockdown remained active, also as stores reopened in the summer months of 2020. Looking at the same March-April 2020 cohort and its most recent data, we continue to see that it consistently outperformed the comparable cohort from March-April 2019, also during Q2 2021. These developments once again exemplify that the COVID-19-induced step change in online penetration is proving to be sustainable and that we are able to capitalize on it thanks to our platform strategy. As a consequence of Zalando's continued traction with consumers, fashion brands and retailers are engaging with our direct-to-consumer platform more deeply than ever before to capture the online growth opportunity to the fullest. This is evidenced by the continued strong traction we are observing across all our key partner-facing platform services over the past 18 months. Partner program GMV grew by more than 100% year-over-year in the first half of 2021. While we onboarded more than 500 new partners since the beginning of the pandemic, the majority of our growth was driven by increased stock commitments of existing partners, as evidenced by an ever-growing amount of new and available SKUs on our platform. On top, our partners increasingly leverage Zalando Fulfillment Solutions to ship their merchandise in a customer-centric and cost-efficient manner to customers in our international markets. As a consequence, the number of shipped items with Zalando Fulfillment Solutions during H1 grew by more than 140%. With Connected Retail, we offer brands and retail partners a model that allows them to connect their brick-and-mortar stores to the Zalando platform. By the end of June, nearly 4,700 connected retail stores sold through our platform. To put this into perspective, we were able to onboard more stores in the last two years than Inditex has in total in Europe. Additionally, we launched connected retail in France, Switzerland and Belgium, making it available across a total of 13 markets. Active store churn on the platform remained extremely low, at below 1%. although the commission waiver introduced as part of our corona relief measures for the broader fashion industry came to an end at the close of the first quarter and we returned to full commission in Germany as of June. For us, this is a clear indicator that store owners consider connected retail as a key part of their own omnichannel strategy, also post-pandemic. Last but not least, Zalando Marketing Services, which enables our partners to increase the visibility of their offering, and to build their brand on Zalando also recorded very strong growth of more than 120% in the first half of 2021, following an initial industry-wide setback at the beginning of the pandemic. This strong growth was mainly driven by performance marketing campaigns, which helped partners to drive direct sales on the platform, while services related to branding campaigns picked up as well as brand demand for big branding investments started to rebound. and is expected to gain even more importance in the second half of this year. In concluding the section on platform dynamics, I would therefore like to emphasize again that customer and partner engagement continues to grow strongly, making us more confident that we can play an even bigger role for the European fashion ecosystem going forward, and that we can achieve our ambitious growth targets to reach more than 30 billion GMB by 2025, and to serve more than 10% of the European fashion market long-term. Next to further improving, scaling and geographically expanding our core fashion platform, we will capture this tremendous growth opportunity by further deepening customer relationships through elevating distinct and marketable propositions such as Stalando Lounge, our own premium and beauty. Following our recent announcement about our strategic partnership with Sephora, I would therefore like to take the opportunity today to particularly focus on beauty. Online beauty represents a highly attractive market for Zalando. The European beauty market will grow to a size of about 120 billion euros and its online penetration will increase to over 25% in the next 5 to 10 years from a currently relatively low level of only 11%. Also in beauty, online has made a step change as a result of the pandemic. For us, beauty is a logical next step to unlock our growth potential in the years to come. Beauty allows us to attract new customers, but also enables us to build much deeper relationships with existing customers than a fashion-only destination ever could. Already today, three out of five of our customers also buy fashion products when shopping beauty. At the same time, we can leverage our existing industry-leading infrastructure and capabilities to support our growth ambitions, not just in fashion, but also in beauty. We can access beauty supply via traditional wholesale partnerships as well as our direct-to-consumer offerings partner program and connected retail and thereby enable a broad and attractive selection at high availability. Our logistics network allows us to serve our customers with beauty products all over Europe and our technology and payment platform covers the whole value chain of e-commerce for us and our partners with the ultimate goal to build a truly elevated beauty experience for European beauty customers. And we made strong progress on this journey since the launch of the beauty category at Zalando back in 2018. By now, we are offering customers more than 16,000 distinct beauty products across 10 markets, covering the full beauty spectrum. Our customers can choose from more than 350 brands, including many popular brands from renowned beauty houses like L'Oreal, Estee Lauder, and Coty. Going forward, we will further innovate our beauty experience along two key dimensions. We want to further improve assortment access and we want to offer an even more compelling customer experience. With the recent announcement to join forces with beauty retailer Zephora, we will create an unrivaled online prestige beauty experience. Through the partnership, the attractiveness of our assortment will significantly improve, benefiting from Zephora's prestigious and exclusive beauty portfolio of more than 300 brands, including halo brands like Chanel or Dior. Starting in Germany in Q4 2021, the partnership is set to be successfully rolled out through our partner program to other Zalando markets as of 2022. But great brands and products alone won't be enough to offer our customers a leading online beauty experience. At our Capital Markets Day in March, we already gave you a glimpse of the multi-sensory experience that we envision to create for our beauty customers on Zalando. an experience that incorporates beauty-specific functionality, content, and communication to respond to beauty-specific requirements, such as the need for more advice and product trials. We are very excited about our multi-year vision to build an industry-leading beauty proposition and are accelerating our efforts and investments to push our beauty experience to a differentiated and unique level over the next 12 to 18 months. This concludes our strategic update for today. Let's now turn to our Q2 financials and start with a more detailed look at our top-line growth. Group top-line growth in the second quarter once again came in at an exceptionally high rate with GMB growing by 40% year-over-year. I would like to particularly highlight in this context that when looking at a two-year CAGR, we were even able to accelerate our growth in Q2 quarter-on-quarter and have seen our highest two-year CAGR since the outbreak of the pandemic in March 2020. Growth was supported by a continued strong consumer demand for online offerings, as extended lockdowns remained in place across most markets at the beginning of the quarter and were only gradually lifted over the course of the quarter. The strong performance of Zalando's partner business as well as successful sales events also fuelled our growth in the second quarter. In Q2, partner GMV growth again exceeded overall GMV growth significantly. This also explains to a large degree the gap of around 5.7 percentage points between GMV and revenue growth, which is particularly well pronounced in the DAF region, where the platform transition is most advanced. Now let's take a look at the development of each of our three segments. Our core sales channel fashion store saw GMV growth of 40.3% GMV year-over-year, in Q2 across both regions. Most notably, the Dutch region even outperformed the rest of Europe this past quarter with a very strong GMV growth of almost 44%, particularly driven by our most mature market, Germany, growing well ahead of the group, supported by the success of the platform transition as well as ongoing lockdown restrictions for the first two months of the quarter. The rest of Europe grew strongly as well with 37.1%, GMB growth against an exceptionally strong prior year baseline. Growth was particularly strong in Southern Europe and Eastern Europe, supported by increased marketing investments, ongoing strong new customer acquisition and reduced churn. When looking at a two-year CAGR, we still see rest of Europe outperforming DAF with an exceptional CAGR of 36% in rest of Europe and 35% in DAF. Furthermore, our off-price segment continued with its strong growth trajectory in the second quarter of 2021, recording GMB growth of 39.2% year-over-year, driven by our flash sales destination Zalando Lounge, thanks to a highly engaged customer base. While our outlet business was flat year-over-year due to ongoing restrictions for offline retail. The other business segments followed the positive trend, driven by a particularly strong performance from Zalando marketing services, where we saw strong demand from fashion brands, resulting in revenue growth of more than 120% in the first half of the year. Besides using ZMS to drive sales on the platform by increasing visibility, our partners continue to invest more again in branding campaigns to build their brand equity on Zalando. Let's now turn to profitability. In addition to a very strong growth momentum, we recorded an adjusted EBIT of 184.1 million euros in the second quarter, representing a 6.7% margin. Profitability was supported by a strong top-line performance and low logistics costs, driven by higher utilization rates across our European logistics network and an ongoing return rate benefit. At the same time, we deliberately ramped up our marketing and pricing investments to capture the full demand potential. Overall, quarterly profitability remained below last year's level, mainly resulting from decisive marketing investment cuts as part of our initial crisis response back in spring 2020. However, when looking at the margin for the first half of 2021, as well as the margin development over the last two years, you can clearly see our margin increasing. When looking at the regional profit distribution in our core fashion store segment, we can see that our more mature markets in the DACH region delivered remarkably strong absolute as well as relative profitability, also supported by a higher partner business share, but remained below last year largely to higher marketing investments to fully capitalize on demand opportunity. Rest of Europe profitability decreased, driven by continued overproportional investments into customer acquisition and pricing, to drive growth and market share gains in these countries, which from now on also includes the six additional markets that we launched recently. Off-price and other businesses also increased their profitability both in absolute and relative terms year-over-year. Let me now give you some more color on cost line developments that drove profitability in the second quarter. Our gross margin decreased marginally by 0.2 percentage points year over year in the second quarter, mainly as a result of increased price investments to stay competitive against a highly promotional offline environment as stores reopened as well as as a result of continued business mix changes in terms of category mix and country mix. Our fulfillment cost ratio improved year over year as a result of higher levels of utilization driven by the strong business volumes and improved order economics on the back of a higher average item value and an ongoing yet temporary return rate benefit. Our marketing cost ratio increased significantly by 4.6 percentage points year over year as we stepped up our customer acquisition and engagement investments supported by our ROI-based marketing approach to capture the full demand opportunity. Please also note that we left an all-time low in marketing cost ratio recorded in Q2 last year as a result of our initial crisis response. Last but not least, admin costs improved year-over-year as a result of increasing economies of scale. Turning to cash-related items now, we recorded an increased working capital year-over-year. The main driver behind this development is a relatively stronger increase in inventories and in receivables than in payables, reflecting deliberately pre-poned fall-winter 2021 inbounds to mitigate potential supply chain disruptions, and a generally strong spring-summer 2021 business volume. CAPEX spending year-to-date is comparable to last year. All major projects are on track. We expect the majority of the CAPEX planned for 2021 to materialize in the second half, as CAPEX for our large logistics infrastructure projects is usually back-end loaded. Mainly due to our strong operational performance, we recorded a positive free cash flow of 167.6 million euros for the first half of 2021, up from 39.9 million euros in the prior year period. During the quarter, we saw a cash outflow of 105.7 million euros for our share buyback program. We successfully completed the share buyback at the end of July and have bought back 2.1 million shares and just spent below 200 million euros. As a result, our cash balance at the end of Q2 amounts to 2.3 billion euros. Let's now turn to our full year 2021 outlook. When COVID-19 hit Europe in spring 2020, we experienced a dramatic change in our business environment as well as in our private lives. As part of our decisive initial crisis response, we focused first and foremost on protecting the health and safety of all Zalandos, defended the financial health of the company and made a big effort to become part of the solution for the European fashion industry. Following the initial demand shock, we have by now experienced five consecutive quarters of exceptional performance, fueled by the accelerated shift of consumer demand from offline to online channels. Our platform strategy has allowed us to not just play an even bigger role for customers, but to also create significant growth opportunities for partners. As evidenced by our strong performance year-to-date, we continue to enhance our strong strategic and financial position, which in turn enables us to invest with even more confidence, to realize our long-term vision to be the starting point for fashion, and to capitalize on the tremendous growth opportunity ahead of us. With most of the lockdown measures now being eased across Europe and consumer mobility increasing, growth rates have started to normalize in recent weeks, as expected, compared to the elevated levels achieved during the first half of the year. And these growth rates are approaching now our mid-term target growth corridor of 20 to 25%. Although significant uncertainty remains with regards to the further evolution of the pandemic throughout 2021, we continue to assume a gradual return to the new normal in the second half of the year with some life restrictions remaining in place until the end of 2021. Based on our strong year-to-date performance and our unchanged expectations for the second half of the year, we therefore confirm our upgraded full-year 2021 guidance as outlined in May. For GMV, we continue to anticipate GMV growth between 31 and 36% for 2021, reflecting an unchanged expectation for the second half. For revenue, we continue to forecast that revenue growth will trail GMB growth as a result of the strongly growing partner business and will thus come in at a rate of 26 to 31%. For profitability, we now expect adjusted EBIT in the upper half of our initial range of 400 to 475 million euros, driven by an outstanding top-line performance and continued return rate benefits in the first half of this year. On cap-related items, we maintain our previous guidance on achieving negative net working capital. With regards to CapEx, we now expect to spend around 350 million euros this year and therefore to come in around the low end of our initial 350 to 400 million euro range. While all major logistics infrastructure projects remain well on track and we continue to invest into our logistics and technology platform at full speed, We already see today that some of the CapEx initially expected for 2021 will be shifted into spring 2022 as CapEx is typically more back-end loaded. Let me close this presentation by reiterating that based on our vision to be the starting point for fashion and on our strategy to transition to a truly sustainable platform business model, we are ideally positioned to capture the immense opportunity ahead of us, serving even more customers, building deeper relationships with them, and creating significant growth opportunities for our partners. With that, I would like to conclude our presentation and now turn to Q&A.

Thank you. Now we'll begin our question-answer session. If you have a question, please dial 01 on your telephone keypad to enter the queue. Once your name has been announced, you can ask your question. If you find your question answered before it's your turn to speak, you can dial 02 to cancel your question. Please limit yourself to two questions per person. One moment, please, for the first question. Our first question is coming from Rocco Strauss from Arata Research. Sir, please go ahead.